Higher global oil prices, sharp depreciation in rupee, and rising borrowing costs due to tightening monetary policy are among a host of factors that will limit the pace of the Indian economy’s growth over the next few years, with the real GDP growth in 2019 and 2020 pegged at 7.3 per cent against around 7.4 per cent in 2018, said Moody’s Investors Service.
The global credit rating agency has cautioned that the greatest downside risk to India’s growth prospects stem from concerns about its financial sector.
“The 7.9 per cent growth in India’s economic activity in the first half of 2018 in part reflects post-demonetisation base effects. Still, the economy remains one of the strongest performers, supported by robust domestic consumption and a pick-up in investment activity. The larger picture is, however, mixed,” it said.
Moody’s assessed that the impact of higher global oil prices compounded by a sharp rupee depreciation raises the cost of households’ consumption basket, and will weigh on households’ capacity for other expenditures.
“Borrowing costs have already risen because of tightening monetary policy. We expect that the Reserve Bank of India (RBI) will continue to steadily raise the benchmark rate through 2019, further dampening domestic demand,” the agency said.
Economy at the risk of a credit squeeze from NBFCs
While cautioning that the greatest downside risk to India’s growth prospects stem from concerns about its financial sector, Moody’s observed that the RBI has taken steps toward recognising the extent of non-performing loans through extensive asset quality review and pushed banks to take large non-performing accounts to the bankruptcy court under the Insolvency and Bankruptcy Code.
“It (RBI) has placed the 11 weakest banks under the prompt corrective action framework, aimed at improving the financial health of banks. Stabilising the banking sector will likely be a long drawn-out process. But the economy is now at the risk of a credit squeeze from non-bank financial entities, following the Infrastructure Leasing & Financial Services Ltd default crisis.
“For now, wider systemic risk has been contained with assurances of liquidity support from the RBI, securities regulator and the Finance Ministry. In the short term, however, while measures to stabilise the financial sector are put in place, credit growth is likely to slow,” the agency said.
Downside risks from a prolonged liquidity squeeze for non-bank financial institutions, which could lead to a sharper slowdown in their credit provision, remain, it added.
Global growth to slow in 2019 and 2020
Global economic growth will slow down in 2019 and 2020 to a little under 2.9 per cent, from an estimated 3.3 per cent in 2018 and 2017, Moody’s said in a report.
In addition, a slowdown in global trade amid rising trade tensions will have an adverse impact not only on growth in the US and China, but also on growth in open economies such as Japan, Korea and Germany.
“Growth in advanced economies will slow but remain solid in 2019, while G20 emerging markets growth will remain weak,” says Moody’s Vice-President Madhavi Bokil, lead author of the report.
“In the US, waning fiscal stimulus, ongoing removal of monetary accommodation and more restrictive trade measures will lower growth. The euro area will also see cyclical moderation to trend growth. Among G-20 emerging market countries, Turkey and Argentina will experience contractions, while China will experience a slowing economy.”
The agency opined that gradual removal of monetary policy accommodation by major central banks will continue to have large spillovers outside the currency areas.
“As major central banks start to rescind forward guidance and withdraw monetary accommodation, financial volatility, term premia and credit spreads will increase globally. Moody’s baseline forecasts assume this will occur relatively smoothly, occasionally interrupted by stints of financial market volatility,” the report said.